Existence and local indeterminacy of periodic equilibrium paths in infinite horizon models with external effects

Summary. It is expected that every periodic equilibrium path may exist even under standard assumptions such as low discounting and the concavity of utility functions in infinite horizon models with external effects. Nevertheless, until now no such example has been presented. In this note we will first construct a bounded growth model that has an external effect and every periodic equilibrium path under any discount factor. Next we will study the conditions under which periodic equilibrium paths have a local indeterminacy. Received: December 23, 1998; revised version: April 19, 1999     

Human–capital investment and the wage gap

Summary. According to empirical studies, the wage differential by skills evolved non–monotonically in the past decades although the relative supply of skilled labor steadily increased. The present paper provides a theoretical explanation for this finding. In our setting, technological change intertemporally alters the human–capital investment incentives of heterogeneous individuals. As a consequence of changing incentives, the time path of the relative wage is U–shaped while there is a rise in the share of skilled workers. Received: November 28, 2000; revised version: January 30, 2001     

Numerical solution of dynamic oligopoly games with capital investment

Summary. This paper discusses how numerical techniques may be used to solve the simultaneous functional equations that arise in general dynamic stochastic games. Unlike the conventional linear-quadratic approach, our methods may be used to address general model specifications that may include non-quadratic objective functions, non-linear equations of motion, and constraints on decision variables. As an illustration, we apply our methods to a dynamic duopoly game in which competing firms play short-run quantity game subject to production cost that can be lowered through investment in capital stock in the long run. Received: June 1, 2000; revised version: December 27, 2000     

Genetics, family structure, and economic growth

Recent biomedical research shows that roughly three-quarters of cognitive abilities are attributable to genetics and family environment. This paper presents a growth model that characterizes the role of the intergenerational transmission of genes and the effect of family environment on growth trajectories. If the average human or physical capital stocks are sufficiently low, the model shows that the economy will be caught in a poverty trap. Conversely, countries with more resources will converge to a bala nced growth path where the average rate of genetic transmission of skills from parents to children determines the long-run rate of output growth. Increased genetic diversity (or income inequality) is shown to raise the fertility rate and reduce output growth in the transitional dynamics. Thus, nature and nurture are able to explain a variety of countries' growth experiences.     

Nash and Walras equilibrium via Brouwer

Summary. The existence of Nash and Walras equilibrium is proved via Brouwer's Fixed Point Theorem, without recourse to Kakutani's Fixed Point Theorem for correspondences. The domain of the Walras fixed point map is confined to the price simplex, even when there is production and weakly quasi-convex preferences. The key idea is to replace optimization with “satisficing improvement,” i.e., to replace the Maximum Principle with the “Satisficing Principle.” Received: July 9, 2001; revised version: February 25, 2002 RID="*" ID="*" I wish to thank Ken Arrow, Don Brown, and Andreu Mas-Colell for helpful comments. I first thought about using Brouwer's theorem without Kakutani's extension when I heard Herb Scarf's lectures on mathematical economics as an undergraduate in 1974, and then again when I read Tim Kehoe's 1980 Ph.D dissertation under Herb Scarf, but I did not resolve my confusion until I had to discuss Kehoe's presentation at the celebration for Herb Scarf's 65th birthday in September, 1995. RID="*" ID="*"Correspondence to: C. D. Aliprantis     

Bank structure, capital accumulation and growth: a simple macroeconomic model

Summary. This paper analyzes the equilibrium growth paths of two economies that are identical in all respects, except for the organization of their financial systems: in particular, one has a competitive banking system and the other has a monopolistic banking system. In addition, the sources of inefficiencies, as a result of monopoly banking, and their relationship to the existence of credit rationing are explored. Monopoly in banking tends to depress the equilibrium law of motion for the capital stock for either of two reasons. When credit rationing exists, monopoly banks ration credit more heavily than competitive banks. When credit is not rationed, the existence of monopoly banking leads to excessive monitoring of credit financed investment. Both of these have adverse consequences for capital accumulation. In addition, monopoly banking is more likely to lead to credit rationing than is competitive banking. Finally, the scope for development trap phenomena to arise is considered under both a competitive and a monopolistic banking system. Received: September 20, 1999; revised version: December 3, 1999     

On the geography of conventions

Summary. We study an evolutionary model in which heterogenous boundedly rational agents interact locally in order to play a coordination game. Agents differ in their mobility with mobile agents being able to relocate within a country. We find that mobile agents enjoy a higher payoff and always benefit from increased mobility, while immobile agents benefit from increased mobility at low levels of mobility only. This wedge in payoffs weakly increases as mobility increases. Some extensions are discussed. Received: January 10, 2001; revised version: December 4, 2002 RID="*" ID="*" We thank, without implicating in any way, George Mailath for helpful discussions. Some of the ideas in this paper were developed during the V Conference of the Society for the Advancement of Economic Theory in Ischia, Italy. The NSF provided financial support. Correspondence to: T. Temzelides     

Bank's capital structure under non-diversifiable risk

Summary. The aim of this paper is to study the design of optimal capital structure of a “large” intermediary when the intermediary faces a non-diversifiable risk, within the standard costly-state-verification (CSV) model. I demonstrate that, under weaker conditions, a “large” intermediary realizes more efficient allocation by issuing both debt and equity than by issuing only debt. Unlike Diamond (1984) and Williamson (1986), the set of optimal contracts involves ex ante monitoring made by shareholders of the intermediary. Changes in parameters, such as the variance of the aggregate risk or the cost of monitoring, affect bankruptcy costs and the capital structure. Received: October 12, 1998; revised version: March 20, 2001     

Growth and social security: the role of human capital

This paper studies the growth and efficiency effects of pay-as-you-go financed social security when human capital is the engine of growth. Employing a variant of the Lucas model [Lucas, R.E., 1988. On the mechanics of economic development. Journal of Monetary Economics 22, 3–42.] with overlapping generations, it is shown that a properly designed, unfunded social security system leads to higher output growth than a fully funded one. Furthermore, the economy with an unfunded social security is efficient, while the other one is not. These results stand in sharp contrast to those obtained in models where the reason for economic growth is physical capital accumulation.     

The role of human and social capital in growth: extending our understanding

Human capital, institutions and social capital are now all recognisedas significant factors of growth. They have largely been studiedseparately, and although they present sufficient common characteristicsto be conceptualised as one main category distinct from physicalcapital, it may still be more important to focus on the linksbetween their specific sub-categories. Direct links with incomemay be spurious, as there appears to be a ‘web of associations’between the sub-categories, which would benefit from furtherempirical investigation. This paper reviews the literature onhuman capital, institutions and social capital, extracting threesub-categories of human capital (human skills capital, stock-of-knowledgeand entrepreneurship) and two of social capital (low- and high-rationalisation).Specific areas are then suggested for further empirical study.     

The learning economy and embodied knowledge flows in Great Britain

This paper examines the `learning economy' from the perspective of occupational characteristics and changes in the British labour market between 1980 and 1992. Following a discussion of the learning and knowledge economy, cross-sectional employment data are analysed to ascertain which occupations can be classified as knowledge-based. Longitudinal career history data are then used to trace the flows of these `knowledge workers' over time. Sectoral shifts are examined, with a particular focus on the knowledge-intensive service sectors. The data come from the Employment in Britain survey: a large-scale employee survey from 1992. The approach used allows us to measure somewhat intangible aspects of economic behaviour such as learning and tacit knowledge and attempt to trace their flows. Shifts in knowledge from the manufacturing to the service sector are shown to be important and related to previous work which demonstrated the importance of knowledge intensive business services for both output and productivity in manufacturing.     

Variety,growth and demand

A dynamic model of demand compatible with a changing composition of the economic system is presented in this paper. Consumers are not expected to have completely formed preferences for radically new objects of consumption. Consumers adopt new goods or services ,created by innovation, only if three barriers are overcome: 1) a critical (minimum) level of income, 2) critical human capital, 3) critical fitness. However, even a new good or service with a fitness higher than that of pre-existing ones, will not be immediately adopted. Consumers'.limited knowledge will slow down the rate of adoption of any new good or service.     

A Schumpeterian model of equilibrium unemployment and labor turnover

This paper constructs a general equilibrium model of equilibrium unemployment by combining an endogenous growth model with a variant of equilibrium search theory. The analysis offers two explanations for the causes of widening wage gap between skilled and less-skilled labor, and rising unemployment rate among the less skilled: technological change in the form of an increase in the size of innovations or skilled labor saving technological change in R&D activity. In addition, the model identifies two distinct effects of faster technological progress on the aggregate unemployment rate. First, it increases the rate of labor turnover and therefore increases the aggregate unemployment rate – the creative destruction effect. Second, it creates R&D jobs, which offer workers complete job security, and consequently reduces the aggregate unemployment rate – the resource reallocation effect.     

A differentiable homotopy to compute Nash equilibria of n-person games

Summary. The literature on the computation of Nash equilibria in n-person games is dominated by simplicial methods. This paper is the first to introduce a globally convergent algorithm that fully exploits the differentiability present in the problem. It presents an everywhere differentiable homotopy to do the computations. The homotopy path can therefore be followed by several numerical techniques. Moreover, instead of computing some Nash equilibrium, the algorithm is constructed in such a way that it computes the Nash equilibrium selected by the tracing procedure of Harsanyi and Selten. As a by-product of our proofs it follows that for a generic game the tracing procedure defines a unique feasible path. The numerical performance of the algorithm is illustrated by means of several examples. Received: December 21, 1999; revised version: December 27, 2000     

资本流动性的测量——基于资本流动性结构分析

首先对资本流动性进行了概念界定,认为资本流动性即为资本流入流出占一国国民生产总值的比值,并对几种测量资本流动性的方法进行了简要评述。在总量规模法的基础上运用直接测算法、间接测算法、克莱因测算法、非直接投资净额调整法测量了我国的资本流动性。结合对我国资本流动性结构特征的变化的分析,发现直接投资的流动性稳步下降,证券投资和其他投资的流动性为上升趋势,而总资本流动性呈震荡上升趋势。其中,在不考虑资本外逃时,其他投资对总资本的流动性变化起到主要作用。     

Capitalism and democracy in the 21st Century: from the managed to the entrepreneurial economy*

 This paper explains how and why the developed countries are undergoing a fundamental shift away from a managed economy and towards an entrepreneurial economy. This shift is shaping the development of western capitalism and has triggered a shift in government policies away from constraining the freedom of business to contract through regulation, public ownership and antitrust towards a new set of enabling policies which foster the creation and commercialization of new knowledge. The empirical evidence from a cross-section of countries over time suggests that those countries that have experienced a greater shift from the managed to the entrepreneurial economy have had lower levels of unemployment.     

Knowledge of growth and the growth of knowledge

The central theme of this address is the complicated relationship between the growth of the economy and the growth of knowledge. This theme is explored with the help of a single concept “restless capitalism” which is used to capture the idea that capitalism in equilibrium is a contradiction in terms precisely because the growth of knowledge cannot be meaningfully formulated as the outcome of a constellation of equilibrating forces. This theme is explored through a discussion of growth accounting, the relationship between innovation, markets and institutions and, as an example, the development of innovation in the field of ophthalmology. We also discuss some pioneering contributions made by Simon Kuznets and Arthur Burns to the discussion of evolutionary growth. From this Schumpeterian perspective we see the economy as an ensemble not an aggregate entity and so see more clearly the importance of microdiversity in the relationship between growth of knowledge and growth of the economy.     

Is capital a collusion device?

Summary. We examine how irreversible capital reduces the possibility of a duopoly to sustain implicit collusion by grim strategies, when the product is homogenous and firms compete in quantities. Compared with the case of reversible capital, there are two countervailing effects: Deviation from an existing collusion is less attractive, because capital once installed causes costs forever. But the punishment will also be less severe due to the high capacity the deviating firm can build before punishment starts. The last effect dominates, meaning that the commitment value of capital is negative for all firms. If capital is irreversible, collusion breaks down for realistic magnitudes of interest rates. Received: April 30, 1999; revised version: November 30, 2001     

Endogenous fluctuations in the demand for education

Abstract. Enrollment rates to higher education reveal a quite large variation over time which cannot be explained by productivity shocks alone. We develop a human capital investment model in an overlapping generations framework that features endogenous fluctuations in the demand for education. Agents are heterogeneous in their beliefs about future wage differentials. An evolutionary competition between the heterogeneous beliefs determines the fraction of the newborn generation having a certain belief. Costly access to information on the returns to education induces agents to use potentially destabilizing backward looking prediction rules. Only if previous generations experience regret about their human capital investment decisions, will agents choose a more sophisticated prediction rule that dampens the cycle. Access to information becomes key for stable flows to higher education. RID="*" ID="*"We would like to thank Cars Hommes, Florian Wagener, seminar participants at the University of Amsterdam, participants of the workshop on ‘Skill Needs and Labor Market Dynamics’ at the Wissenschaftszentrum Berlin für Sozialforschung (WZB) for helpful discussions, and an editor of this Journal and three anonymous referees for their comments. Tuinstra's research is supported by the Netherlands Organisation for Scientific Research (NWO) under a MaG-Pionier grant. Neugart acknowledges financial support from the German Ministry of Education. Parts of the research were done while Tuinstra was visiting the WZB and when Neugart was visiting CeNDEF. Correspondence to: The research for this paper was done while the first author was affiliated with the Wissenschaftszentrum Berlin für Sozialforschung.     

Why peg? The role of capital mobility and financial intermediation

Many economists argue that the growth of international capital mobility has made the maintenance of pegged exchange rates more costly, forcing developing states to choose alternative arrangements. But some states do not simply abandon pegged exchange rates as their exposure to capital mobility rises. Some states abandon pegs long before a crisis can erupt, while others maintain pegs until the speculative pressures became unbearable. Why, in an environment of growing capital mobility, do some states maintain pegs longer than others do? One reason is that the more that bank lending dominates investment in a country, the more likely that state is to hold on to a pegged exchange rate. When banks have accumulated significant amounts of foreign debt they lobby for exchange rate stability. In a bank‐dominated financial system, a concentrated banking sector can organize easily and use its crucial role in the economy to exert influence over economic policy. This article presents new evidence from statistical tests on 61 developing countries that confirm that states with deeper banking systems are more likely to peg their exchange rates, in spite of growing capital mobility.